I actually started writing this article on Silver 5 days ago as a quick synopsis of where we are, but through new research and trading the silver market this last week I suddenly realised (also through conversations with fellow investors) that this silver market has broken below valuations that literally are beyond comprehension. I have never seen a market like this in over 25 years of trading and studying markets – I am not joking !.
If you are interested in Silver and its future potential then I suggest you read this piece in its entirety. Considering this piece has now turned into somewhat of a marathon, I needed to break it down into sections. ( 2013 Supply & Demand Deficit / Silver above ground Inventories / Mining costs of Silver / Gold ~ Silver Ratio / Ore grade degradation / Silver (ratio) valued against base metals / Silver valued against Monetary aggregates, followed of course with my very quick Conclusion). I could of course extend this article into numerous other avenues, but if you do not understand Silver at the end of this article I will physically hold up my hands and claim surrender.
Firstly you have to remember that there are no World Silver stockpiles to speak off, although estimates have been placed at between 800 Moz to 1.5 Boz above ground stockpiles these are predominately held within private hands (no official holdings) and will not see the light of day unless Silver is substantially revalued (compared with that other precious metal Gold, with estimated above ground stockpile of 6 Bio Ounces).
Silver 2013 Supply / Demand “Deficit”
Mine production is reported to have grown by 4% this last year (2013) to 815 Moz (25,350 Tons), with production growth primarily coming from the US, Mexico and Dominican Republic. With reported re-cycled Silver to come in roughly around 240 Moz (although with such low prices of Silver achieved in 2013 recycling becomes awfully uneconomical) , then we have a total available supply of 1,055 Moz (32,815 tons) in 2013 (very approximate using official data)
Now as GFMS & Silver Institute have stated themselves, demand in 2013 shaped up as the following……
Industrial Applications (46%) 458 Moz (14,245 Tons)
Photography (6%) 63 Moz (1,960 Tons)
Jewelry & Silverware (23%) 242 Moz (7,527 Tons)
Coins & medals (11%) 116 Moz (3,608 Tons) (coin demand in 2013 has been extremely strong).
Now according to my calculator that leaves just 176 Moz (5,474 Tons) left over for investment demand. (Implied Investment in 2012 was 160 Moz)
Turkey Silver imports surged to 228 tons in 2013 from a previous figure of 140 tons in 2012 and just 42 tons in 2011. This is recognised as pure investment demand.
While India have reputedly imported 5,400 tons of Silver in 2013. Now considering India’s yearly imports in 2012 was only 1,900, an increase of 3,500 tons can only be recognised as very dynamic investment demand (industrial usage of silver world wide has not just shifted to India in the last 12 months I can assure you).
So only looking at just 2 countries (India & Turkey) in 2013, Silver investment demand increased ’year over year’ by 3,600 tons from previous investment levels. These import figures demonstrate a severe supply / demand deficit in 2013 (and yet the price moved lower ?).
Now I have studied import data from all the major centre’s of import demand (present in 2012) and even though China imports have dropped off around 6% from the 2012 data in 2013, there are no major sources of demand that have dramatically dropped off. So if you include this enormous increase in import demand from just India and Turkey of 3,600 tons, the numbers simply do not add up ! There is a huge deficit …….
Silver above ground Inventories. Supplied the deficit hole in 2013 ?
The World relies on annual production and recycling to balance the supply / demand stresses. As you can see from the chart below, stockpiles of Silver have been decimated since the 2nd World War due to massive underinvestment, industrial demand for silver that has grown enormously with very little recycling due to the enormously
artificial depressed prices of silver, hence it was simply un-economical (re-cycling that is) to do so.
So considering and World stockpiles of Silver is held privately (no Government stockpiles), we have to look at Silver physical holdings held in trust in the form of ETF’s. As you can see below and talked about here, Silver ETF holding saw zero selling and in fact actually experienced some small net inflows.
This leaves us with a huge unanswered question, where did the Silver come from to fill this huge yearly Supply/ Demand deficit ?
Silver mining costs.
Silver mine production costs, which is quite simply the floor under the Silver price over the medium term (for obvious reasons). The World production of Silver by prime silver miners, is estimated at approximately $ 24 as a pure break even price with Capex investment heavily curtailed and exploration expenditure approaching zero (what businesses do you know off that actually operates at break even for any length of time, no profit ??). The primary miners managed to come out flat in the first 3 Qtrs of 2013 because they achieved an average of US$ 24.58 for their silver sales, however the silver price has capitulated much lower over the last 4 months to trade around US$ 20.00 approximately. This is effectively destroying their capabilities to be in the production business all together. Now do not mis-understand me, there are mining producers out there that can produce Silver and still make a reasonable profit margin at todays
artificial price US$20 (these low cost primary silver miners will do enormously well as an investment in the next leg up in Silver prices), but taken on an average across the whole primary group that just simply is not the case.
Considering in 2012 (2013 numbers not in yet) primary silver miners accounted for 28% of total global production (the remaining majority of silver produced is as a by product of lead and zinc mining for example), any drop off in production by the primary miners will devastate the finely balanced pendulum of global silver production.
See chart below courtesy of SRSrocco and his article ‘Silver price to Head Higher As Cost Production Forms A Base’
If you hold someone under water you eventually have to let them up for air otherwise you kill them outright. Mining production costs and hence Silver miners are losing money as a group for the last 4 months (4th Qtr 2013 & January 2014 so far..), if the Silver price does not rise substantially and very soon then quite simply miners will go out of business and production of metal will obviously fall dramatically. This will only aggravate the supply / demand deficit to even more extremes and eventually catapult the Silver price to extreme levels due to major shortages.
Gold / Silver Ratio
Gold Silver Ratio chart below as of 30th January 2014
Silver has not actually made all time nominal high in over 33 years (never mind inflation adjusted – in fact we could argue one of the rarest earth metals in existance has underperformed every commodity on planet earth). On the recent pattern only gold made an all-time nominal high, higher (but not much higher) than any previous highs. Silver only equalled its 1980 all-time nominal high (lower high). This is a major non-confirmation which signals that although the two patterns played out in a similar manner, it does not mean that the recent highs in 2011 is the end of the gold and silver bull market just like in 1980.
Courtesy of Hubert Moolman article….
However, why did we not get the final blow-off rally for silver, to a price much higher than any precious nominal high? Again, it can be best explained by looking at the Gold Silver ratio. Below, is the same 100-year Gold/Silver ratio chart:
However, here I show a more relevant comparison to the 70s bull market (pattern). On the chart, I have marked the 70s bull market with points 1 to 5. Instead of comparing it to the latest bull market, starting in 1999, I compare it to the period starting in 1980, when silver peaked in January of that year to now (which I have market 1 to 4, with point 5 still to come). If point 5 occurs lower than 15 (as illustrated), we will have a very accurate fractal (pattern), similar to the one of the 70s (but bigger).
This is a more relevant comparison since both patterns starts from a major peak in silver, 1968 and 1980, respectively. Both patterns started at the bottom of the 100-year range of this ratio, in fact, at a major bottom (1968 & 1980).
The current pattern has not completed yet, and it would suggest that it will only complete at a point much lower than a ratio of 15. Such a completion of the pattern is consistent with the bullish fundamentals of silver (and gold) in relation to paper money – understanding that a lower ratio will likely mean higher gold and silver prices.. Furthermore, it is consistent with the scenario that we are in a downtrend in the ratio; therefore, being, more likely to go lower over the next couple of years. A recent comparison of the relationship between the silver and Dow bull markets tell the same story.
Silver Ore Grade Degradation
Courtesy of SRSrocco article “Silver Price to Rise as Top Miner’s Production Evaporates”
One of the most insidious problems taking place in the gold and silver mining industry is the decline in falling yields. Not many realize, when yields decline, production evaporates and disappears. To offset the decline in metal yields, the mining companies have to add new mines and or increase the amount of processed ore. Increased amounts of ore processing entails massive increases in energy / oil consumption (that is rising in price)…
As you see from the graphic below (click to enlarge), the New Scientist Magazine conducted research (2006) in the true rarity of earth metals. This report actually followed up from a report by the USGS (United States Geologist Society) in 2005. Both reports have stated that Silver under present industrial usage and recycling practices will be extinct in industrial quantities by 2020 !!!
I remember reading these studies in 2006 and coming to the obvious conclusion that this development alone would elevate Silvers valuation trajectory far beyond what most people / investors thought at the time.
When the USGS was directly asked to follow up a few years later their response was…
I don’t believe that the USGS would ever use the term “extinct” in regards to the depletion of a resource. The USGS estimates current worldwide silver reserves are estimated to be 510,000 tons. The global demand for silver in 2009 was about 24,400 tons. If nothing else were to change, the implication would be that we’d run out of silver in about 20 years. However, new deposits are still being discovered, and scarcity should lead to higher valuation, which should eventually lead to more exploration interest.
While cheap silver ore may become scarce, given the right price, it shouldn’t become extinct!
Regards, • Greg Durocher
• USGS Office of Communications &Publications
• Science Information Services –Alaska
I will give my remarks to this response in my conclusions at the end.
Silver (ratio) Valued Against Base Metals
Now the point of this exercise is to recognise if Silver over the last 14 years has actually appreciated against base metals (as would be expected due to its ongoing rarity) or has the market in Silver been priced
artificially lower than its true state of rarity ?
|Jan 1999||Copper||0.7 US$/Ib||US$ 5.10 oz||7.28|
|Jan 2004||Copper||1.2 US$/Ib||US$ 6.30 oz||5.25|
|Jan 2009||Copper||1.6 US$/Ib||US$ 11.50 oz||7.19|
|April 2011||Copper||4.3 US$/Ib||US$ 49.08 oz||11.41|
|June 2012||Copper||3.5 US$/Ib||US$ 28.08 oz||8.02|
|29th Jan 2014||Copper||3.5 US$/Ib||US$ 19.30 oz||5.5|
On this above example….the higher ratio number (on the right) the more valued Silver is in the market, what you can see from this demonstration is into the World Silver stockpile decimation (2007) and the early part of the decade the ratio was roughly 7. The enormous move in Silver in 2011 the ratio peaked at 11.4. As of today the ratio has recorded a low 5.5 and in fact Silver has lost over half of its value against copper since 2011 and is 25% cheaper than 14 years ago. Has copper become much rarer and hence requires a greater valuation over and above Silver or in fact the opposite is true???
Do not forget that Copper is over 800 times more abundant than Silver in the earth’s crust.
Copper currently trades at 7,155 US$/Ton. Convert to Ounces = (7,155 / 32,150) 0.226 US$, present Silver / Copper ratio = (19.2 / 0.226) 86 – hence Silver is at least 900 % undervalued against Copper !!!!!
|Jan 1999||Lead||491 US$/Metric Ton||US$ 5.10 oz||96.27|
|Jan 2004||Lead||753 US$/Metric Ton||US$ 6.30 oz||119.52|
|Jan 2009||Lead||1,145 US$/Metric Ton||US$ 11.50 oz||99.57|
|April 2011||Lead||2,719 US$/Metric Ton||US$ 49.08 oz||55.39|
|June 2012||Lead||1,850 US$/Metric Ton||US$ 28.08 oz||65.88|
|29th Jan 2014||Lead||2,142 US$/Metric Ton||US$ 19.30 oz||110.98|
|Jan 1999||Zinc||931 US$/Metric Ton||US$ 5.10 oz||182.55|
|Jan 2004||Zinc||1,015 US$/Metric Ton||US$ 6.30 oz||161.11|
|Jan 2009||Zinc||1,202 US$/Metric Ton||US$ 11.50 oz||104.52|
|April 2011||Zinc||2,371 US$/Metric Ton||US$ 49.08 oz||48.31|
|June 2012||Zinc||1,855 US$/Metric Ton||US$ 28.08 oz||66.06|
|29th Jan 2014||Zinc||2,000 US$/Metric Ton||US$ 19.30 oz||103.62|
Silver valued against Monetary aggregates
If you are measuring Silver against a particular yardstick (US$ – Fiat Currency), then a devaluation / destruction / overproduction of that particular currency (yardstick) has to be taken into context. Silver has not increased in quantity, but Fiat currency sure has…..
Submitted by Alasdair Macleod, Gold Money: “FMQ Update and the Implications for Gold & Silver”
I will not copy and paste is whole article (you can click the link above) but you can see from monetary aggregates that Silver is actually 15% cheaper than the Year 2,000 when it averaged US$ 4.95 !!!
An explanation of how FMQ is derived please read and listen here.
This is illustrated in Chart 1 below.
FMQ measures the difference between currency, measured by cash and deposits, and sound money by retracing the evolution of currency from gold and fully-backed gold substitutes. It is therefore fundamentally different from conventional measures of money supply, which compare changes in themselves over time. Instead it is a comparison between sound and unsound money.
The fourth chart shows the price of gold adjusted for the increases in FMQ and above-ground stocks of gold since January 1960, when gold was fixed at $35 (yellow line) compared with the nominal dollar price (red line).
At $1200 nominal, which was the gold price on 31 December 2013, the adjusted price is $76, slightly more than double the price in 1960 US dollars. We cannot put together the components of FMQ before 1959 because the statistics are not available, but at that time FMQ was similar in quantity to the discontinued M3 series at $292bn and $300bn respectively. M3 in 1933, when gold was revalued to $35, stood at $41.53bn, and above-ground gold stocks increased from 35,327 tonnes to 60,137 tonnes between 1933 and 1959. So measured in 1933 FMQ dollars the price of gold adjusted for the increase in above-ground gold stocks today is approximately $6.72.
The next chart shows gold in 2000 US dollars rebased to 100.
In these adjusted terms gold at $1200 nominal in December 2013 is 124% of its price in January 2000. At that time equity markets were in a bubble to rival the South Sea of 1725, systemic risk was the last thing on investors’ minds, and FMQ has since hyper-inflated. Furthermore the gold price in 2000 reflected protracted bear market sentiment that had built up over two decades.
Therefore, based on gold prices from the 1930s onwards gold in real terms appears extraordinarily undervalued.
The last chart shows the price of silver adjusted for the increase in FMQ and rebased to January 2000.
Since silver is mainly consumed as an industrial metal, and the strategic above-ground stocks accumulated in the last century are now depleted, it is not appropriate to adjust the silver price by changes in the quantity of silver when measuring it in FMQ terms. The adjustment over time is therefore entirely from the currency side. Taking this into account, the adjusted silver price at end-December is 85 on our index and so is at a 15% discount to the price at the beginning of January 2000, more than eliminating the price spikes in 2008 and 2011.
Silver has fallen precipitously since the 2011 peak and many commentators state that this was due to a commodity sell off and that Silver was overvalued, which is quite simply not true as I have proven against base metal valuations. Base metals which can be supplied in abundance to World demand and Silver has halved in value (against these base metals) and not only that, but is now trading significantly lower than 15 years ago against many of the base metals out there (copper & lead for example), how on earth can you reason this considering it rarity, production costs and its increased demand ?
Silver experienced a significant supply / demand deficit in 2013 and the supply to fill this hole I have not yet discovered from where it could have come from. Ore grades in Silver are falling dramatically and production costs of mining Silver are significantly higher than todays levels. The USGS stated that Silver has to be significantly revalued to avoid industrial quantity extinction, which they target as early as the year 2020 and yet silver falls in price !!!
Silver is mined at a ratio of 9 to 1 against Gold production presently and has no available stockpiles above ground to access (unlike Gold) and yet the Gold Silver ratio trades at 65 !! Silver valued against the US$ (taking into consideration the increases in monetary aggregates) now trades 15% lower than the year 2000.
I know investors and people keep stating to me that price is the arbitrager (so end of story), but all you have to do is look under the bonnet and realise Silver is presently the most undervalued it has been in the last 15 years and faced with its fundamental backdrop is quite literally the most attractive opportunity I have ever seen. It is also the only commodity I know off that has never traded above its nominal high set 33 years ago, even with massive expansion of credit and available currency !!
I know where I want to put my money.
Mitch - Silver Sufferer
David Morgan states the Silver low is in !
I have studied this issue as much as anyone other than The Moneychangerauthor Franklin Sanders. A 45-foot long historic silver chart covering the last 4,500 years, where each foot would be 100 years, shows that only in the last 19 inches the silver-gold ratio would be above 16:1. The 4,400 years before that, it would be less than 16:1! So, from a long-term perspective it means silver is undervalued to gold.